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Moneygram Accuses Citigroup

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Citigroup Inc. (C - Free Report) has been sued by Moneygram Payment Systems Inc., the electronic cash-transfer business, Bloomberg reported. The complaint lodged claims that Citi misrepresented documents during the sale of $140 million of collateralized debt obligations (CDOs).

Moneygram Payment Systems Inc., a subsidiary of Moneygram International Inc. (MGI - Free Report) , offers its customers payment processing services. The company provides banks, thrifts and credit unions with official checks, which are commonly used in consumer loan closings.

Further, the company sells money orders through them and offers them clearinghouse services. Moneygram Payment Systems charges fees for its services, but derives revenue mainly from the float funds underlying the checks and money orders.

Moneygram alleged that Citi and its two units, Citigroup Global Markets Inc. and Citigroup Global Markets Ltd., issued misleading statements and omissions related to the CDOs and has concealed risks associated with the same. The company further claims Citi sold nine mortgage-related CDOs from 2005 to 2007 under a fraudulent scheme. Moneygram was misled into making these investments.

Moneygram has filed a suit in the State Court in Minneapolis in October. The company demands compensation for damages, which includes lost market value of the CDOs and other unspecified penalties.

In October, Citi also paid $285 million to settle U.S. regulatory claims for misleading investors of $1 billion collateralized debt offering in 2007. The SEC has stepped up its investigation on Wall Street companies over the sale of CDOs that were responsible for significant losses incurred by the investors.

The continuously increasing number of lawsuits will dent Citigroup’s reputation and its financials.

Last week, Wells Fargo Securities, a unit of Wells Fargo & Company (WFC - Free Report) – the closest competitor of Citi was sued by Loreley Financing, a group of special-purpose entities. The complaint lodged claims that Wells Fargo Securities misrepresented documents in the sale of over $163.3 million of CDOs.

Earnings Recap

Citi’s third-quarter 2011 earnings per share of $1.23 outpaced the Zacks Consensus Estimate of 81 cents. The result also improved significantly from the earnings of $1.09 in the prior quarter and 72 cents in the year-ago quarter. Credit valuation adjustment (CVA) increased third-quarter earnings by 39 cents per share.

The better-than-expected result was driven by a drop in provisions for credit losses. Moreover, Citigroup’s top line was slightly relaxed with revenue increasing 1% from the prior quarter, and also managed to exceed the Zacks Consensus Estimate.

Though a favorable result is encouraging, we do not expect the company to experience a significant improvement in its top line due to weak performance of Citi Holdings in the near term.

Also, the tardy economic recovery and escalating expenses are somewhat limiting its earnings growth. However, in the long run, we believe that investments and efficiency savings will help grow a solid market share, though weak equity business will remain a headwind.

Citigroup currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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